Mexico City, 31 October 2013

Europe: Progress in bank resolution and banking union Shaping the New Framework for Global Financial Regulation

LACEA & LAMES

2013 Annual Meetings

Santiago Fernández de Lis

Section 1

Overall European regulatory initiatives Section 2

Banking resolution Section 3

Banking union

Index

Page 2

Section 1

Overall European regulatory initiatives

Capital/

Leverage

Liquidity

CRD IV

Systemic Risk

Structural

reforms Liikanen report

Supervision

Macroprudential

ESAs: • EBA

• EIOPA

• ESMA

Bank Resolution

Financial

markets

OTC derivatives

EMIR

MiFID II/ MiFIR

CRAs regulation

DGSD BRRD

ESRB

SSM

SRM Banking

Union Page 3

Section 1

CRD IV: Transposition of Basel III

Page 4

• Pending LCR definition • Reach 100% in 2018 (BIS: 2019). MS could request earlier implementation!

Systemic Risk Buffers

Leverage

Capital requirements & capital buffers

• In line with Basel III: 4,5% CET1 + 2,5% conservation buffer • Countercyclical buffer: up to 2,5% (under national authorities responsability)

Systemic risk (“flexibility package”)

Members States have discretionary powers in its implementation: • Systemic risk buffer (financial sector): 1 – 3% • SIFI Buffer (insititutions): G-SIFI (1-3,5%); Other-SIFI (0-2%)

Minimum ratio of 3% (compliance since 01/2019, a year later than in US)

Liquidity

• From 2015 bonuses capped to fix salary (1:1) • May be doubled (with shareholders approval)

Remunerations

Implementation date: 01/01/2014

Section 1

Overall European regulatory initiatives Section 2

Banking resolution Section 3

Banking union

Index

Page 5

Section 2

Resolution: main elements

Page 6

• Avoiding that bank resolution has a cost for taxpayers

• Based on FSB Key Attributes

• In Europe fixing bank resolution is not only about Too Big To Fail

Objetive

• Bridge institution

• Bail-in

Competition policies (State aid)

Resolution fund

• Harmonized hierarchy of creditors

• Minimum internal loss-absorption

• No Creditor Worse Off liquidation principle

• Discretionary exclusion of certain liabilities

• Resolution fund/deposit guarantee schemes: joint or separate

• Target level of 0.8 % of covered deposits if separated (if joint 1.3%)

• Access to alternative financing arrangements (i.e. ESM)

• Sale of business

• Asset separation

Tools

Main aspects under discussion (Trialogue)

Bail-in

• State aid temporary rules

• Government stabilization tools

8% of internal loss absorption

8% of total liabilities to be absorbed by shareholders & creditors before RF can be used

Use of Resolution Fund (RF)

Financing of RF

After 8%: RF could be used to absorb losses or recapitalize the bank. This contribution is capped at 5% total liabilities.

CET1

AT1 and AT2

Subordinated debt

Senior Debt & Corporate deposits

>EUR 100,000

Households & SME Eligible deposits

(> EUR 100,000)

HIERARCHY

DGS (covered deposits)

LOSS ABSORPTION

Internal absorption 8 % liabilities

(hierarchy order)

Resolution Fund 5% liabilities

More bail-in or eventually alternative

financing sources (private,

public/ESM)

RF co

uld

abso

rb lo

sses

Deposi

tor

pre

fere

nce

• Ex-ante contributions of banks • Ex-post contributions of banks • If the two previous options are insufficient,

alternative financing sources ( private or public)

Alternative financing sources

Under extraordinary circumstances, only after 5% of RF has been reached and all unsecured and non-preferred liabilities other than eligible deposits have been bailed in

Section 2

Resolution: creditor hierarchy and constrained discretion

Page 7

Section 1

Overall European regulatory initiatives Section 2

Banking resolution Section 3

Banking union

Index

Page 8

Section 3

Eurozone needs a banking union

Re-nationalization of the financial system fuelled by (i) market-driven segmentation, (ii) rating agencies and (iii) regulation (mostly moral suasion)

European Banks: Average exposures to banks located in other EU members USD (dollars). Source: BIS

To stop fragmentation and separate sovereign and banking risk

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

800.000

Dec-

05

Jun-0

6

Dec-

06

Jun-0

7

Dec-

07

Jun-0

8

Dec-

08

Jun-0

9

Dec-

09

Jun-1

0

Dec-

10

Jun-1

1

Dec-

11

Jun-1

2

Dec-

12

Jun-1

3

Core to core Core to periphery

-42%

-55%

Use of cross-border collateral in Eurosystem monetary policy operations (% total) Source: ECB

0%

10%

20%

30%

40%

50%

60%

70%

80%

Dec-

07

Mar-

08

Jun-0

8

Sep-0

8

Dec-

08

Mar-

09

Jun-0

9

Sep-0

9

Dec-

09

Mar-

10

Jun-1

0

Sep-1

0

Dec-

10

Mar-

11

Jun-1

1

Sep-1

1

Dec-

11

Mar-

12

Jun-1

2

Sep-1

2

Dec-

12

Distressed countries Non-distressed countries

Section 3

The banking union project

Page 10

• Single Supervisory Mechanism:

1. European Central Bank

2. National supervisory authorities

• First of all, a comprehensive asset review (AQR)

• Capital Requirements Directive (CRD IV)

• Not in the roadmap yet

• Possibly requires a reform of the Treaty

Single Resolution Mechanism:

1. Single Resolution Authority

2. Single Resolution Fund

Single Rulebook

Single Supervision

Single Resolution

Single Deposit Guarantee Scheme

Under implementation Under implementation Under negotiation To be negotiated

?

Section 3

Single Supervision

Page 11

On 12/09 the European Parliament approved the Single Supervision Mechanism legislative package and is expected to be fully operational in November 2014

How? Two tier system: • Mandate: Eurozone-wide financial stability

• Authority: ECB legally responsible for all banks in the eurozone

• ECB direct supervision (130 significant banks)

• Indirect supervision through national supervisors (the rest: 6,000 entities)

• Scope: Eurozone + open for no euro countries willing to join

• Governance: Separate Board inside the ECB

Why? Restore confidence in the euro currency by stopping financial market fragmentation

Why the ECB? Prestige, independence, know-how + legally suitable

Risk: Necessary separation between supervision and monetary policy

Prerequisite? Deal with legacy issues Asset Quality Review (during 2014)

Section 3

Single Supervision: ECB Vs NSAs

Page 12

• Banking license • Assess acquisitions and disposals of holdings in

banks • Ensure compliance with prudential ratios • Set higher prudential requirements under Union

law • Set additional capital buffers (countercyclical

buffer or other macroprudential tools) • On-site investigation • Ensure robustness of banks governance

agreements • Individual supervisory stress tests • Early intervention powers • Coordinate & defend common position of EU17

before EBA • Participate in Supervisory Colleges and Crisis

Management Groups

• Receive requests for provision of banking services

• Supervision of payment systems • Assist ECB and day to day verification

linked to supervision • Consumer protection • Fight against money laundering and

terrorist financing • Supervise 3rd country branches

ECB National Supervisory Authorities

Section 3

Banking union: Final remarks

Page 13

1. The EZ needs a fully fledged banking union (SRM as a counterparty for the SSM)

2. Dealing with legacy problems is key: comprehensive assessment including (i)

Supervisory Risk Assessment; (ii) Asset Quality Review and (iii) Stress Test.

3. Backstops: private, public (national), public with ESM support (but no direct

recapitalization before SSM)

4. Bail in will contribute to separate the sovereign and banking risk

5. Negotiations on SRM are at stalemate. Fiscal union by backdoor? Reform of the

Treaty? Uncertainty on the German stance

6. Keep making progress. Both authorities and the industry have to work on the design of

the transition

Thanks! sfernandezdelis@bbva.com